How does a sole proprietor (self-employed) or an independent contractor report their business income and expenses for tax purposes?

Form T2125, Statement of Business or Professional Activities on your personal income tax form must be completed. A separate form must be completed for each business or professional activity you operate if you have two or more of either. The Statement of Business or Professional Activities are reported based on a calendar fiscal year; hence the Year-end is December 31st.

What income amounts should be reported?

Your income includes all the revenue received for the goods and services you provided. The income you report is less than the amount of GST/HST that is collected if you are registered for GST/HST.

What expenses amounts should be reported?

Deduct any reasonable current expense you incur to earn business or professional income. The expenses you can deduct include any GST/HST you incur on these expenses minus the amount of any input tax credit claimed. Please note you cannot deduct personal expenses, only the business part of your expenses can be claimed on the Form T2125 Statement of Business or Professional Activities. In addition, you cannot claim the expenses you incur to buy the capital property.

What is the accrual method?

In most cases, self-employed individuals report their income using the accrual method of accounting. With this method, you report your income in the fiscal period you earn it, regardless of when you receive the income; and deduct expenses in the fiscal period you incur them, whether you paid them in that period or not. Incur usually means you either paid or will have to pay the expense. Income from professional activities is business income. Therefore, you report it using the accrual method.

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